The granulated Zn is preferred to metallic Zn in the preparation of hydrogen because granulated zinc has more surface area exposed to the acid, so the reaction can occur more rapidly.
Downward displacement of water is used to collect water insoluble gases which are less dense than water. Hydrogen gas meets this criteria and is therefore collected by the downward displacement of water.
The scientific principle here is the property of matter called impenetrability.
The principle states that no two matter can occupy the same space at the same time. As hydrogen gas enters the container filled with water, the liquid water goes out from the container. You will know that the collecting container is already filled with the hydrogen gas since all the water has gone out.